Highest and Best Use Analysis

[Buddy214]

Hey guys, could you please help clear something up for me regarding highest and best use. I have a vacant residential site in a developed residential neighborhood. I concluded that the highest and best use would be to buid a house on that site "as improved residential". That seams pretty straight forward and clear to me, but I have a fellow appriaser telling me that the highest and best use 99% of the time for a vacant site in a developed neighborhood would be "its current use" as an unimproved resdential vacant site. This makes absolutley no sense to me. He says that if the appraisal was not checked "current use", the banks could not loan on the property. How can the highest and best use of a vacant site be to leave it dirt. From what I understand you have to meet the four tests, with one of the tests being one which brings the highest economic return on your capital investment. I understand that sometimes market conditions factor into the anaysis, but wouldn't utimatley the highest and best use at some be to build something on this lot? Thanks, Ed

 

[Meandering]

Hey guys, could you please help clear something up for me regarding highest and best use. I have a vacant residential site in a developed residential neighborhood. I concluded that the highest and best use would be to buid a house on that site "as improved residential". That seams pretty straight forward and clear to me, but I have a fellow appriaser telling me that the highest and best use 99% of the time for a vacant site in a developed neighborhood would be "its current use" as an unimproved resdential vacant site. This makes absolutley no sense to me. He says that if the appraisal was not checked "current use", the banks could not loan on the property. How can the highest and best use of a vacant site be to leave it dirt. From what I understand you have to meet the four tests, with one of the tests being one which brings the highest economic return on your capital investment. I understand that sometimes market conditions factor into the anaysis, but wouldn't utimatley the highest and best use at some be to build something on this lot? Thanks, Ed

1. market conditions always factor into the analysis as economically feasible. If it cost more to build than what it could sell for, then, it's not economically feasible to build.

2. whether or not the bank will lend on it, is not a test of highest and best use.

3. Highest and best could be as vacant if, the lot is so irregular in size or so encumbered by set backs as to reduce to stupidity the size of the building that could be built. Typically more common with commercial pieces, than with residential lots, but it does happen when subdivision was old and new pipe lines or wetland delineations indicate that there is insufficient land available to build on. It also happens under certain market conditions, like Detroit. If you build it, they still won't buy it. It may also happen when the interim use is vacant but a major change is expected in the local area that might push values quickly, like here, they are talking about removing the school tax from real estate. If they do, values will soar. So in the interim, its better vacant without any reason to pay tax on a building until the change, if it happens.

4. The AI teaches a very nice class on this subject. Just a suggestion that maybe you and your buddies check into taking it.


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[Buddy214]

1. market conditions always factor into the analysis as economically feasible. If it cost more to build than what it could sell for, then, it's not economically feasible to build.

2. whether or not the bank will lend on it, is not a test of highest and best use.

3. Highest and best could be as vacant if, the lot is so irregular in size or so encumbered by set backs as to reduce to stupidity the size of the building that could be built. Typically more common with commercial pieces, than with residential lots, but it does happen when subdivision was old and new pipe lines or wetland delineations indicate that there is insufficient land available to build on. It also happens under certain market conditions, like Detroit. If you build it, they still won't buy it. It may also happen when the interim use is vacant but a major change is expected in the local area that might push values quickly, like here, they are talking about removing the school tax from real estate. If they do, values will soar. So in the interim, its better vacant without any reason to pay tax on a building until the change, if it happens.

4. The AI teaches a very nice class on this subject. Just a suggestion that maybe you and your buddies check into taking it.


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Thanks for the reply. I do appreciate it. Those are some interesting points that make sense to me. However, what I am talking about is just a normal lot in a fully developed neighborhood with none of the scenarios you mentioned. If market conditions are not a factor, that is to say, there is demand for these lots, would the highest and best use be “current use” or “improved residential”. I understand that whether the bank can loan on it or not is not a highest and best use test. My buddy is saying that if the HBU was not “current use” the bank could not lend on the property. I really appreciate your reply, as I am just trying to wrap my brain on this stuff. I thought it was pretty clear to me. He is pretty adamant that my thinking is flawed. Again, he says that 99% of the time, the HBU of a vacant site is its current vacant use. The 1% is allowing for the scenarios you pointed out.

 

[Lost Cause]

My buddy is saying that if the HBU was not “current use” the bank could not lend on the property...

Whether a bank can lend on properties which are not at their H&BU would be a policy decision for each bank. I am not aware of any regulations prohibiting such loans.

 

[rbrienza]

Your friend needs to take a HBU class.
Banks loan on vacant land all the time.

 

[Meandering]

Thanks for the reply. I do appreciate it. Those are some interesting points that make sense to me. However, what I am talking about is just a normal lot in a fully developed neighborhood with none of the scenarios you mentioned. If market conditions are not a factor, that is to say, there is demand for these lots, would the highest and best use be “current use” or “improved residential”. I understand that whether the bank can loan on it or not is not a highest and best use test. My buddy is saying that if the HBU was not “current use” the bank could not lend on the property. I really appreciate your reply, as I am just trying to wrap my brain on this stuff. I thought it was pretty clear to me. He is pretty adamant that my thinking is flawed. Again, he says that 99% of the time, the HBU of a vacant site is its current vacant use. The 1% is allowing for the scenarios you pointed out.

So I'll try to answer this for you.

The highest and best use, is the use that will return the greatest economic benefit to the land.

Considering your residential scenario, if it will cost you $100k to build a home that could be sold for $102k, and the vacant lot is worth $1k, the highest and best use is to build the home.

If it costs you $100k to build a home that could be sold for $100k and the value of the land is $1k, the highest and best use is to remain vacant or to build some other type of structure that is legally permissible under the zoning ordinance.

As far as your buddy and his concern for the bank.... throw him the USPAP
Standard 1-2(b)

in terms of financial arrangements equivalent to cash; or

Your job is to identify the application of the definition of value. If your bank will not lend on it, then you don't have terms of financial arrangements that are equivalent to cash.

In that case, and this was the case in many areas with lots of subprime loans, You have a special application of your definition of market value and need to consider:
or financing with unusual conditions or incentives.

And their impact on market value and the market value definition.


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[Lee Lansford]

...

He says that if the appraisal was not checked "current use", the banks could not loan on the property.
...

...



Such thinking is NOT a part of H&B Use analysis.

Find another appraiser friend to give you advice.

 

[Michigan CG]

Vacant lot surrounded by a bunch of houses. What is the Highest and Best Use?

Four tests:

Is it legal to build on?

Is it physically possible?

What would make the property realize its highest value (maximum productivity)?

Now I am guessing that you can answer yes to the first two questions and that the answer to question #3 is that building a house on the vacant lot would make it worth the most.

BUT, there is a fourth question, and that is the question of financial feasibility.

If you buy the lot and then spend money to build a house will the value of the TOTAL cost be lesser than or more than the total cost?

If the answer is MORE than highest and best use is to develop the lot. If the answer is lesser then the answer is to NOT develop the lot.

But then we are not done yet. What would be the best use for the vacant lot? Should we hold on to it and wait for the market to improve so that it is financially feasible to build? Will that happen?

In my area there are many neighborhoods that the highest and best use is to sell the land to one or more neighbors and I have many sales showing that. The guy on the right bought the land, the guy on the left bought the land or both neighbors went together and split the lot.

A highest and best use analysis is not just checking a box of what one "thinks", it is actually an analysis.

Get a new friend who actually knows what they are talking about.

 

[George Hatch]

You're here because you weren't confident in the answer your friend provided. As it turns out, you're instincts were right.

If the values of existing homes don't support the cost of new construction right now it might make sense to hold, but sooner or later it probably will be feasible to build. At that point there probably still won't be any other allowable uses for the site.

 

[Ken B]

The question I would ask myself is why has this one lot never been developed? Then I would work hard to answer that question. Because the last thing I would want to do is value a vacant lot which could NOT be developed for some reason as a developable lot. My E&O insurance provider would probably appreciate that diligence.